26 September 2018

Bill for new design and distribution, and ASIC product intervention powers, introduced

This article was written by Ian Paterson and Kathryn Tomasic.

Mr Stuart Robert MP, Assistant Treasurer, introduced the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 into the House of Representatives on 20 September 2018.

The Bill will make significant amendments to the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 with the aim of improving consumer protection in relation to financial and credit products.

Some of the key takeaways in relation to the Bill are outlined below.

 

Background

The Bill is a response to a Financial System Inquiry recommendation that a “targeted and principles-based product design and distribution obligation” should be introduced in line with a number of overseas jurisdictions (see further here). The Bill:

  • requires issuers of financial products who have a disclosure obligation to make appropriate target market determinations for the product; and
  • requires issuers and distributors of those financial products to take reasonable steps to ensure that products are marketed and distributed only to people in the target market, and only in accordance with the target market determination.

In addition, the Bill gives ASIC powers to make a “product intervention order” if a financial product or credit product has resulted in or will, or is likely to, result in significant detriment to “retail clients” (in the case of a financial product) or “consumers” (in the case of a credit product).

 

Design and distribution obligations

Key provisions

The new design obligation for financial products is an obligation to make a public target market determination for the product. It applies to anyone who must provide a disclosure document under Part 6D or a product disclosure statement under Part 7.9 for the financial product ("issuer").

A target market determination describes the class of retail clients that comprise the product’s target market, sets out any conditions and restrictions on dealings in, or providing financial product advice in relation to, the product, sets out arrangements for periodic review of the determination and specifies a number of reporting obligations for distributors.

A target market determination must be “appropriate”, meaning that it would be reasonable to conclude that, if the product were issued or sold:

  • to a retail client in accordance with the distribution conditions—it would be likely that the retail client is in the target market; and
  • to a retail client in the target market—it would likely be consistent with the likely objectives, financial situation and needs of the retail client.

The issuer must periodically review the determination to ensure that it remains appropriate for so long as the product is on offer for acquisition by issue or regulated sale to retail clients.

The distribution obligations  apply to retail product distribution conduct in relation to a financial product.  Retail product distribution conduct means any of the following:

  • dealing in a financial product in relation to a retail client
  • giving a disclosure document under Part 6D.2 of the Corporations Act 2001 in relation to an offer of the financial product to a retail client
  • giving a product disclosure statement under Part 7.9 of the Corporations Act 2001 for the financial product to a retail client; and
  • providing financial product advice in relation to the product to a retail client.

This means that the distribution obligations will only regulate distribution activities to retail clients.

The Bill requires offerors and distributors:

  • not to deal in, or provide advice in relation to, the product unless a target market determination has been made;
  • to take reasonable steps to ensure that dealings in, and financial product advice provided in relation to, the product are consistent with the determination;
  • to report a range of matters – including the incidence of complaints about the product – to the issuer, and keep records to support the reporting obligations; and
  • to notify ASIC of significant dealings in relation to a retail client that are not consistent with the target market determination.

The Bill also gives ASIC power to issue stop orders if there has been a breach of these obligations, to modify the Bill’s operation and to grant exemptions.

 

What is a “financial product”?

The Bill allows the regulations to modify the concept of “financial product” for the design and distribution obligations. First, the regulations can extend the concept of “financial product”. The Government has indicated that it intends to make regulations to include the following financial products in the regime:

  • depository interests in simple corporate bonds, where the simple corporate bonds are, or are to be, issued under a two-part simple corporate bonds prospectus;
  • debentures of a body that is an Australian ADI or registered under section 21 of the Life Insurance Act 1995;
  • basic deposit products; and
  • custodial arrangements that are not already subject to the new regime, including an interest in an investor directed portfolio service.

Secondly, the Government has indicated that it intends to make regulations to exclude the following financial products from the regime:

  • depository interests in fully paid ordinary shares in a foreign company that would, if offered directly to retail clients, be excluded from the regime;
  • medical indemnity insurance; and
  • interests in defined benefit superannuation funds and eligible rollover funds.

The Bill specifically excludes financial products offered by an exempt body or an exempt public authority, in addition to other specified financial products (including fully paid ordinary shares in a company or a foreign company).

When does it start?

The design and distribution obligations will come into force 24 months after Royal Assent.

What are the implications?

The Bill also includes substantial civil or criminal penalties for failure to comply with the new obligations. It also expressly provides for civil liability to anyone who suffers loss or damage because of a breach of the obligations. The Court will also have powers to make other orders “necessary to do justice between the parties”, including  declaring contracts void where a person has contravened certain provisions of the Bill and another person has suffered loss or damage because of the contravention.

 

Product intervention powers

The Bill gives ASIC a significant, proactive power to issues  a “product intervention order” if it is satisfied that a financial product or a credit product “has resulted in or will, or is likely to, result in significant detriment” to retail clients or consumers (as applicable).

A product intervention order can require that a person or class of persons not engage in specified conduct in relation to the product. The power is prospective only. An order may be conditional – the Bill gives, as an example, a condition that the product not be issued to a retail client / consumer unless the retail client / consumer has received personal advice. ASIC will also be able to order downstream notification to retail clients / consumers.

The Bill does not elaborate on what “significant detriment” may be but sets out a number of considerations that ASIC must take into account in reaching a conclusion on whether significant detriment has or may occur – including the impact that any detriment from the product has had, or will or is likely to have, on retail clients / consumers.  These matters include the nature and extent of the detriment, the actual or potential financial loss to retail clients and the impact that the detriment has had or will or is likely to have on retail clients.

There are specific things that a product intervention order may not do:

  • require that a person satisfy a standard of training, or meet a professional standard, other than a standard otherwise prescribed for the person by or under the Act;
  • require a person who is not required to hold an Australian financial services licence to become a member of an external dispute resolution scheme; and
  • impose requirements related to a person’s remuneration, other than requirements related to so much of the person’s remuneration as is conditional on the achievement of objectives directly related to the financial product.

The Bill requires that ASIC undertake a consultation process before it makes a product intervention order.  Any order other than one relating to a particular financial or credit product will be a legislative instrument, open to disallowance by the Parliament.

An order may last up to 18 months. However, an order can remain in force for a longer period - or permanently - if the Minister so declares.

What are the implications?

The Bill also includes substantial civil or criminal penalties for failure to comply with the new obligations. It also expressly provides for civil liability to anyone who suffers loss or damage because of a breach of a product intervention order. The Court will also have powers, among other things, to declare contracts void.

When does it start?

The product intervention powers will come into force on Royal Assent.

What next?

The Bill has been referred to the Senate Economics Legislation Committee and its report is due on 9 November 2018.

Offerors and distributors of financial products to retail clients should consider how the Bill is likely to affect their activities, noting in particular that the product intervention power is available to ASIC from the time of Royal Assent.  Offerors should consider the manner in which they would frame target market determinations for financial products subject to the regime.  Distributors should also consider putting in place policies and procedures to comply with the regime.

Offerors and distributors should continue to monitor this space and review the terms of any related regulations. As is the usual practice with regulations, we expect there to be a consultation period prior to finalisation.

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